Q. Are all completion guarantors licensed insurance carriers? Why does it matter?

Both IFG and Fireman’s Fund Insurance Company are licensed by the California Department of Insurance, and therefore are authorized to conduct business within the state. Not all completion guarantors are licensed and regulated by state departments of insurance. Banks and other financiers may be assuming greater risk in accepting a completion guaranty from a non-licensed, non-regulated completion guarantor.

Licensed insurance companies are subject to a number of regulations designed to protect the public against rates that are excessive or unfairly discriminatory, preserve their solvency, detect financial problems and protect policyholders in the event insolvency occurs. State insurance laws require licensed insurers to meet capital and surplus requirements, prepare annual financial statements and pass periodic assessments. These laws establish initial financial requirements, help in the early detection of financial problems and provide security that a licensed insurer will have the ability to pay claims if the guaranty is called.

Moreover, state insurance departments have broad regulatory powers that may be used to ensure that licensed carriers pay claims, and have the authority to conduct hearings and investigations when it appears insurance laws or regulations have been violated.

Regulations also limit the amount of business a licensed insurer is allowed to write. The limit on the amount of business permitted is known as the insurer’s capacity. A licensed insurance company’s capital and surplus levels determine its capacity. It is often difficult to assess the capacity of non-licensed insurers.

Additionally, licensed insurers are required to set aside funds to cover their contractual obligations to pay claims. These funds are known as "loss reserves." A non-licensed insurer that is not required to adhere to these controls might take on excessive amounts of risk, experience losses beyond its capacity to pay claims and become insolvent.